Penguin Solutions Inc (PENG) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SMART Global Holdings First Quarter Fiscal 2020 Earnings Call.

(Operator Instructions) Please be advised that today's conference may be recorded.

(Operator Instructions)

I'd now like to hand the conference over to your speaker today, Ms. Suzanne Schmidt, Investor Relations.

Please go ahead, ma'am.

Thank you, operator.

Good afternoon, and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings first quarter fiscal 2020 results.

Ajay Shah, Chairman and Chief Executive Officer, will begin the call with a discussion of the market and the business, followed by Jack Pacheco, Chief Operating and Financial Officer, who will review the financial results in more detail and provide the forward guidance, after which we will open the call to your questions.

As a reminder, our earnings press release and a replay of today's call can be accessed under the Investor Relations section of SMART's website at smartgh.com.

We encourage you to go to our website throughout the quarter for the most current information on the company, including information on the various financial conferences we will be attending.

Before we begin the call, I would like to note that today's remarks and the answers to questions may include forward-looking statements.

Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement.

Actual results may differ materially from those expressed in these forward-looking statements.

For more information, please refer to the risk factors discussed in the documents we file from time to time with the SEC, including our most recent Form 10-K.

We assume no obligation to update these forward-looking statements which speak as of today.

Additionally, during this call, our non-GAAP financial measures will be discussed.

Reconciliations for those directly comparable GAAP financial measures are included in today's earnings press release.

With that, I will now turn the call over to Chairman and CEO, Ajay Shah.

Thank you, Suzanne, and welcome to everyone on the call.

We completed the first quarter of fiscal 2020 with our memory businesses, which are Specialty Memory Products and Brazil memory, both performing at or above our expectations.

Our Specialty Compute & Storage or SCSS group came in below expectations for the quarter as we saw delays in some orders in our Penguin Computing government business due to some of the budget delays.

As we've communicated previously, some of SCSS is exposed to large government programs, and this area of our business can be lumpy from quarter-to-quarter.

In total, net sales for the first quarter came in at $272 million, just slightly below our guidance range and below the previous quarter's $278 million revenue.

This revenue shortfall contributed to lower-than-expected profitability, resulting in non-GAAP EPS at $0.55 for the quarter but higher than the previous quarter's $0.50 per share.

In this first quarter of fiscal 2020, approximately 38% of revenues came from our Specialty Memory Products business, 35% from our Brazil business and 27% of revenue from Specialty Computing products, which is a very good balance overall of businesses and provide stability and expands our markets served in a very meaningful way.

So we are well on our way to transforming into a balanced set of businesses that provide solutions for the far edge, components for the enterprise data center, embedded components and systems for a broad variety of telecom, networking, industrial, transportation and defense applications as well as large high-performance computing systems for scientific and AI development.

All these businesses are underpinned by our ability to address our customers' unique requirements through our go-to-market and efficient supply chain and delivery systems.

During the quarter, our team here at SGH has made tremendous progress in successfully integrating 2 new acquisitions into our operations and supply chain systems as well as into our IT and financial systems.

We continue to work on integration into our design and development as well as sales, marketing and general management organizations.

Now let me turn to a more detailed review of each of our 3 main lines of business, beginning with Specialty Computing, which represented, as I mentioned, 27% of net sales -- of our net sales in the quarter, which is approximately $75 million.

Inside the SCSS group, we have 3 main areas: Penguin Computing, Embedded Computing or EC and our wireless computing line of products.

Penguin Computing has seen a meaningful increase in its sales pipeline as we are now the second largest dedicated supplier of high-performance computing or HPC systems, particularly HPC AI systems in North America.

However, in this past quarter, some government programs pushed out for budget reasons and results fell short of our expectations for the quarter.

As a reminder, in the previous quarter of fiscal -- previous quarter to this one, Penguin's revenues had more than doubled sequentially as our fourth fiscal quarter is the strongest from a seasonal basis in the government segment.

One highlight for Penguin from the last quarter is the new Magma Supercomputer, an HPC system enhanced by artificial intelligence technology that Penguin developed in partnership with Intel for a major national lab.

We're proud of this converged platform that integrates AI to accelerate HPC modeling for our data scientist customers and is one of the first deployments of Intel's Xeon Platinum 9200 Series processors.

The system qualifies as one of the top 100 HPC computing systems in the world.

In addition, during the quarter, we released our ClusterWare 11 software, a major upgrade of our software stack that's been very well received by our customers as it enables them to scale clusters to virtually any size.

Our Embedded Computing or EC and wireless computing businesses both performed in line with expectations for the first full quarter as part of our businesses.

We are well ahead of plan on EC's overall integration, in particular, EC's manufacturing transition into our U.S. and Malaysia manufacturing locations, which was completed a month earlier than expected.

And further, we are optimistic about the synergies between EC and Penguin as we develop a combined go-to-market strategy, merge some of the organizational functions for efficiency and develop a more platforms-based business model in the HPC AI space as well as for the emerging edge computing applications.

Turning now to our Specialty Memory business, which represented 38% of net sales for the quarter and was about $103.5 million in revenue.

Net sales were roughly the same as the previous quarter, and we note our major customers' demand is still weaker than expected.

However, we are continuing to make progress in developing a broader base of Tier 2 and Tier 3 customers and more domestic and international sales channels.

And this is resulting in increased sales into that segment of customers.

Also, we made great progress in our -- on our in-house development of controller-agnostic firmware for embedded SSDs, both SATA and NVMe, so we will soon release a broad range of products based on our own internal firmware developments and be able to take advantage of this major market opportunity.

Finally, our Brazil line of business represented 35% of total company net sales compared with 32% last quarter and totaled approximately $94 million.

We grew sequentially over the last quarter due to a combination of an improving domestic economy in Brazil, higher unit demand and moderate price declines in the memory market.

It's important to note that in this first full quarter of the new score-based local manufacturing rules, our business performed better than our earlier forecast.

And this gives us confidence that we have bottomed out in our Brazil memory business, although fiscal Q2 is a seasonally weak period in Brazil with the Christmas holidays.

In addition to PC and mobile memory products, we are also seeing solid traction with our battery business in Brazil, which grew quite well in the quarter.

Overall, in summary, we begin fiscal 2020 with a healthy combination of businesses, and Jack will address our guidance in more detail later in the call.

But as we enter our second fiscal quarter, we see our normal seasonality more pronounced this time with the delay of a defense program, which was to be awarded this quarter, for our Embedded Computing business.

Looking out to the rest of the fiscal year, we are optimistic that our business is now in a stronger position as the economy strengthens and new technology drivers such as 5G and AI systems drive incremental demand.

I'd like to conclude my discussion by reiterating that our transformation is well underway, with expanded addressable markets, new products and continued execution.

We look forward to reporting on our progress as the year unfolds.

Let me turn the call over to Jack for a review of our financials and our guidance.

Jack?

Great.

Thank you, Ajay.

Overall, gross revenue for the first fiscal quarter was $418 million, while net sales were $272 million.

As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for an agency basis, meaning that we only recognize the net sales, net profit on supply chain services transactions.

Our breakdown of net sales by end market for the first fiscal quarter was as follows: mobile and PCs, 30%; network and telecom, 23%; servers and storage, 10%; with the industrial, aerospace, defense and other continuing to be our largest end market at 37%.

Now moving to the rest of the income statement.

Non-GAAP gross profit for the first quarter was $55.7 million, an increase from last quarter's $53.4 million primarily due to our memory businesses.

Non-GAAP operating expenses were $37.4 million compared with $35.4 million in the previous quarter.

The increase was primarily due to a full quarter of our 2 recent acquisitions.

Non-GAAP net income for the first fiscal quarter was $13.4 million or $0.55 per diluted share compared with $11.9 million or $0.50 per diluted share in the previous quarter.

Adjusted EBITDA totaled $23.5 million compared with $25.2 million in the prior quarter.

Turning to working capital.

Our net accounts receivable increased to $228.8 million from $217.4 million last quarter, and our days sales outstanding increased to 50 days for this quarter compared with 47 days last quarter.

Inventory totaled $160 million at the end of the first fiscal quarter compared with $119 million at the end of the fourth fiscal quarter.

Inventory turns dropped to 9.1x from 12.5x last quarter as we added the inventory from our 2 recent acquisitions and an increase in inventory for some supply chain programs.

Consistent with past practice, accounts receivable, days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which are $418 million and $364 million, respectively, for the first fiscal quarter of 2020.

Cash and cash equivalents increased to $111.4 million at the end of the quarter, an increase of $13.3 million from the fourth quarter of fiscal 2019 after taking into account $6.4 million of cash to reduce debt.

Beginning with this fiscal quarter, we will make term loan amortization payments on a quarterly basis.

We have been granted a holiday for making those payments in fiscal 2019.

Fourth quarter cash flow from operations totaled $25.3 million compared with $48.9 million in the prior quarter.

And for those of you tracking CapEx and depreciation, CapEx was $5.2 million for the quarter and depreciation was $6.1 million.

Now let me touch on some of the financial dynamics.

As Ajay mentioned earlier, we have seen some delay in the timing of certain federal programs that our specialty computing group has been working on.

We expect this to impact our second fiscal quarter as well.

With that as a backdrop, let me now turn to the guidance for the second quarter of fiscal 2020.

We currently estimate that our second quarter fiscal '20 net sales will be in the range of $265 million to $275 million.

Gross margin for the quarter is estimated to be approximately 19% to 21%.

This decrease in gross margin is mainly due to our seasonally weak period in Brazil.

GAAP earnings per diluted share is expected to be between -- is expected to be $0.14 plus or minus $0.05.

On a non-GAAP basis, excluding share-based compensation expense and intangible asset amortization expense, we expect non-GAAP earnings per diluted share to be $0.50 plus or minus $0.05.

The guidance for the second fiscal quarter does not include any view on the foreign exchange gains or losses and includes an income tax provision expected to be in the range of 2% to 6%.

The number of shares used to estimate earnings per diluted share for the second fiscal quarter is 24 million.

Capital expenditures for the second fiscal quarter are expected to be in the range of $6 million to $10 million.

Please refer to the non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP results and reconciliation of GAAP net income to adjusted EBITDA tables in the earnings press release for further details.

Operator, we're now ready to take questions.

(Operator Instructions) Our first question comes from the line of Brian Chin with Stifel.

The Penguin business in terms of the revenue shortfall, I understand you kind of highlighted -- or lowlighted federal as kind of the reason for that.

But Micron did yesterday talk about some shortages of high-density DRAM modules.

Just curious whether that was a constraining factor at all in terms of project timing for any of your customers.

No.

We -- I don't think that, that was the issue.

What we understand, and I have to say based on our understanding, many of the labs and government agencies have been waiting for the budget appropriations bill to be passed, which I follow very closely as a result.

So as you might have tracked that, that is going through, I believe, the Senate right now, and hopefully, will be approved but through the White House shortly.

So the issue we're talking about is mostly to do with order releases.

All these programs have been approved but they're now waiting for a budgetary green light, and that is what has delayed the release of these orders.

Got it.

So maybe this could steer revenues maybe a little bit more in the back half of the fiscal year, perhaps?

Yes, it will -- our back half of the fiscal year is always stronger in the government anyway.

And we don't expect that this means that we'll stack this business on top of any other forecast.

This will just slide everything out by some period of time maybe.

Our best expectation is 3, 4 months but unfortunately, it's a pen that is -- goes all the way to the White House.

I mean some of these are programs that have to start.

Once they start, they go, but you don't, like Ajay said, they don't add on top.

So if you lose X amount this quarter, the starts next quarter, that doesn't start on top of something else.

That's just when it starts.

It just pushes out.

Everything just pushes out another 3, 4, 5, 6 months to the end of the program.

Sure.

Just one more question here and I have one more question just on our business.

But in terms of the operating margins that maybe you kind of are targeting by the end of this fiscal year, even given the softer start in terms of the Specialty Compute revenue, what are you sort of targeting exiting the fiscal year in that business?

In the Penguin business?

Yes, the Specialty Compute and storage business overall.

Yes.

I mean we typically don't break out our margins by the various areas if you look at the company.

I mean if you look at SMART overall, we'd expect our operating margin will somewhere end maybe the kind of high -- mid- to high single digits this year, kind of the start we've had.

Okay.

Yes, that's helpful.

And then, yes, I think qualitatively, given sort of the flattish plus or minus revenue guide somewhat, Specialty Compute down maybe sequentially, Brazil down sequentially.

And then it sounds like Specialty Memory, I guess, up Q-on-Q.

And so corresponding to sort of your comment about February quarter could sort of be the bottom in that market.

Do you think we're already past sort of the bottom in Specialty Memory revenue right now?

And did you see sort of like momentum build in the quarter kind of beginning to end?

Yes.

I think Specialty, definitely, we think in Q1, we're starting to see a little bit better traction as we exited the quarter with some of our larger OEM customers.

So we were -- we expect that Q1 was kind of the bottom for that business.

Yes.

So there's 2 comments here, right?

One is to do with the business level at our major customers.

Our major customers, we've been expecting a recovery for a couple of quarters and it's been slow and coming, to be honest.

So as I was attempting to explain, we have, over a year ago, started to invest in broadening our customer base into Tier 2, Tier 3 customers and our product base.

And that is what has allowed us to continue to deliver essentially flat revenues even in a declining ASP environment, memory prices continuing to decline.

Now hopefully, the memory prices will stop declining.

That's the indication we're getting from the market.

And in fact, it's a pretty specific indication because our NAND prices are actually going up a little bit and lead times are definitely going out.

And so we are optimistic that our Specialty Memory business, with both those legs, one being new customers, new design wins, and then the other being prices not going down or maybe even going up.

And God knows if our major customers started to be a little stronger, then that would be yet another tailwind.

I don't know if that's the answer you were looking for.

I think it is.

Yes, very helpful.

Our next question comes from Raji Gill with Needham & Company.

The question on the gross margins.

So the margins came in lower in November because of the lower revenue and are kind of guiding slightly -- actually guiding down about 50 basis points sequentially, it came in below expectations.

Is this just primarily a function of the lower volume because of the government programs that are being delayed?

And if so, once that business returns, do we expect to kind of have an uplift in margin?

And any other kind of specific commentary around the drivers of mix as we go into the next fiscal year?

I mean, really, actually the main driver of the gross margin decline that were forecast and it's really Brazil.

Brazil, we have a high fixed cost basis in Brazil.

And Brazil had a -- we're saying we're bottoming out in Q2.

But Q2 is our seasonally weak quarter in Brazil, right?

And so we -- the impact there is it's enough of an impact on the gross margin where it's taking it down 1 point, 1.5 point from where we had kind of thought it would be.

So it's really more targeted to Brazil than the mix, even in the Specialty Compute business.

Okay.

But in Q1, in fiscal Q1, the gross margins came in below your guidance.

Correct.

Yes, that was...

By 150 basis points...

Correct.

That was impacted by this Penguin, the Specialty Compute group having some orders that we thought we were going to get some business, we didn't get that.

It was a higher gross margin kind of business in our forecast.

Right.

Okay.

And the underutilization, I mean, the so-called OCOGs, as we call it, the nonmaterials costs stay fixed but the revenue is reduced so you end up with a lower gross margin.

So it was good to know that you now have one full quarter of the new content rules, the new point systems in Brazil and that you said you performed better than you thought.

I was wondering, is that -- is there potential upside in that business because of the new rules?

Is there better visibility that will be granted to you?

Is there upside to drive higher penetration?

Or is the kind of the sequential growth in Brazil mainly a function of, as you said, higher unit demand and moderate price declines?

I'm just curious about your commentary that you performed better than you thought now that you have a full quarter of the new rule.

I'm just wondering if the new rules could actually -- could help your Brazil business going forward.

Or is it just really based on these other factors?

I think the new rules have -- I was -- I think we were trying to explain the last time as well that the new rules allow us to be much more dynamic in terms of how we address this business.

We're no longer constrained by a certain percentage that the customer must buy, and therefore, there was a floor and a ceiling.

However, now the customer is not constrained in the same way in terms of the floor, but it's not constrained the same way as in a ceiling, if you know what I mean.

And so we've been very active in terms of talking to our customers and persuading them through both our service level, making it easy for them to really concentrate most of their points on memory.

And as I mentioned before, memory turns out to be the lowest cost per point of any major item.

So as a result, we think that, that actually gives us the ability to drive the business further.

So to come back to your question, that allows us to figure out how we want to play market share versus revenue growth versus profitability or rather, call it, gross margin.

And we can work with our vendors as well to try and best position ourselves in front of these customers.

So we, net-net, look at that as good news for various reasons: increased flexibility, the ability to grow the business further.

And so to try and give you a simpler answer to your question: Yes, I think it creates some upside possibilities.

And just a housekeeping question, Jack.

The tax rate of 4%, how do we think about that going forward?

It's been kind of all over the map last year.

How do we think about that?

You can thank our accounting regulators for that, okay?

But I think Q2, we've guided a pretty low tax rate in Q2, but I think we will go back up to where we kind of thought we should be as we get into Q3 and Q4, just with how our -- where we forecast our profits to be.

Okay.

So we should model a what tax rate in Q3 and Q4, something higher than 4%?

Yes.

I mean, back to, I think we said somewhere between 12% to 16% is kind of we talked about kind of for the year.

So we modeled -- we started looking at something more in that kind of range to get back to the back half quarters.

Our next question comes from the line of Mark Lipacis with Jefferies.

First one on the Penguin Computing business.

Ajay, you had mentioned the pipeline looked really good despite some near-term pushouts.

Is that -- can you give some color on that?

Is that due to the consolidation that's happened in the industry?

And are you -- is there like -- do you view this as kind of like a sustainable step function and share gains for you guys as we go through the next several years?

Are there new kinds of programs that you guys are able to prosecute because of this?

That's the first question.

I have a follow-up.

Thank you, Mark.

Yes, that is exactly right.

Because of -- now, really, we'll take 2 different, maybe 3 different sectors.

One is sort of government.

Government may include AI and may not, but certainly large HPC systems.

In the government, as you know, there's a requirement to have more than -- at least 2 and maybe 3 vendors.

And so where we might have been on the customer for cutout, we're now in on many of these programs.

So that is certainly helping the pipeline, and by the way, in some very significant and large opportunities.

Hopefully, and I don't want to jinx it, we -- I think we are really well positioned for a couple of very large opportunities.

Then -- that's the government sector.

Then in the commercial sector, particularly related to some of the newer systems that are Intel-based, we've been investing a lot of our efforts in developing products around some of the new Intel processors.

As I mentioned before, we shipped one of our largest systems ever, the Magma system.

And so we're seeing increased opportunities through those product areas with, particularly, the commercial customer base.

And finally, AI.

I mean you're seeing -- I talked about this and it may not resonate easily.

But in the past, Penguin has always been simply about integrating solutions that the customer wants.

In other words, we were very customer-driven in terms of the actual configurations which we ended up creating.

However, what we've been doing is productizing some of these.

And we now offer what we call solution packs that are for different applications, such as certain AI applications, for example, retail automation.

And now those solution packs give us a different kind of a pipeline opportunity.

So that's really helping to build the pipeline as well.

Is that along the lines of the question you…

Yes, that's very helpful.

And a follow-up, if I may.

On the battery business in Brazil, can you give us a sense of where you are?

And the ramp, how big is that?

And as that business grows, does that help to offset the higher fixed cost, the OCOGs, as you described it, in Brazil?

Or is there a separate set of OCOGs for battery that you have to absorb separately from your existing memory module business in Brazil?

Yes, I'll take that one.

So yes, I mean, we've kind of said, when you remember way back when we started the thing that we said this is about $25 million to $30 million opportunity in the first year, and it's looking to be that kind of an opportunity.

And so Q1, we're well on our way to get in that range for this year on the battery business.

On the OCOG, it's not -- the problem with OCOG for now is the fixed part is really the packaging operation has a huge fixed cost to it.

And so when the units go down our seasonally weak quarter, it definitely drags on the gross margin.

The battery business, a whole separate set of equipment, is not anywhere near the fixed cost of a packaging type operation.

So its impact on OCOG is much lower than what you have from the packaging side of the house.

Okay, that's very helpful.

A last question, if I may.

The -- can you talk about what you're seeing in inventory and the supply chain downstream from yourselves?

You say downstream, you mean at our customers?

At your customers or like...

I mean the issue we've always -- we've been having as those guys have lots of inventory in their downstream channels and they've been slowly burned off.

But it looks like with some of the increased demand that we're seeing for some of our larger specialty customers, that they're starting to get more of that through the channel.

And so their inventory should be declining in the downstream.

Should be, but we've been hoping -- I mean and being -- frankly being given predictions by some of our major customers that, that was going to happen faster than it is happening.

So actually, that's somewhat of a disappointment for us right now.

Yes, historically, it's been a disappointment.

We are seeing a little bit of -- in some of our supply chain business, we're seeing some -- we're seeing more shortages and more kind of going out looking for parts, which means that they're building a little bit more maybe in the CM, so -- which would translate into less inventory.

But we'll wait and see what actually happens there.

Our next question comes from Sidney Ho with Deutsche Bank.

My first question is, can you help us understand the revenue contribution from the 3 separate acquisitions in your guidance or in the quarter, what rate you prefer in terms of dollar growth rate?

Something we can use it as an anchor point.

And related to that, for the segment as a whole, how should we think about the end market exposure of that segment?

And what does that mean to seasonality going forward?

Excellent question, Sidney.

I'm not sure I want to answer it but a heck of a good question.

I mean we said that this new group of companies, right, would be somewhere $80 million to $100 million type business for us when we bought them, and I think...

On a quarterly basis.

Well, no, the 2 new ones.

(inaudible) $80 million to $100 million.

They're tracking a little bit ahead of that, I mean, so we had a good Q1 with those businesses.

Penguin, if you look at Penguin from '19 to '20, we said it should grow -- is going to grow 10%, 15%.

So if you took kind of where it is, that's kind of the growth rate of Penguin, so maybe you can kind of get to where you want to be.

But the 2 businesses we acquired both came in right where we thought they were for the quarter for plans.

They both did very well.

The wireless business, we said we would double that revenue of that business.

So it should be a [$30 million] kind of company and we're well on the way to achieving that in the first quarter on the wireless business.

Yes.

Overall, the Specialty Computing segment is looking like it's, what, $350 million-plus for the year, right?

Roughly around there, yes.

About $350 million for the year for that -- those 3 pieces together.

And you'll see, as we report the Q, that we've now decided to give you more visibility into the gross margins for each of our segments.

So you'll see that in the Q file tomorrow, I think.

Yes.

Okay.

Maybe I'll stay with the Specialty Compute business.

In your prepared remarks, you mentioned you're working on revenue synergies between the EC and Penguin.

Can you elaborate a little bit on what you're doing there?

And are there any kind of milestones that you can share with us?

Absolutely.

Yes.

That's a very interesting area, Sidney, and I'm glad you asked about that one because it's -- the market opportunity has to do primarily with edge computing.

So if you think about what the Embedded Computing business that we acquired used to do, it was mostly focused on deep embedded systems that were then sort of customized either in mechanical, physical ways or in terms of software or in terms of the high availability aspects for different applications.

Meanwhile, Penguin sells large high-performance computing systems, which tend to be racks and racks of servers, sometimes as many as a couple of thousand nodes of servers.

So -- and often the very latest servers.

So now we are able to take those server platforms that we already have, which we are very efficient with and competitive with and be able to customize them as the team at the Embedded Computing side is able to do and has the skill set for, into applications.

The first interesting area is around edge computing, particularly as we look at a range of applications, gaming, payment, retail automation and so on.

So that's an area that has some interesting potential.

So we've got a number of opportunities there that we're trying to -- it's only been 3 months so it hasn't been long enough to really come back to you and say, "Wow, we've been successful with all of this." But very interesting opportunities, a lot of customer interest.

That's one area.

And that's synergies more in the field and in the products.

And then we have a lot of synergies in terms of being able to, for example, develop a switch for high-performance computing that is -- that our Embedded Computing team has a lot of experience with doing.

So we have the ability to now develop particular switching platforms, back planes that go into high-performance computing and AI applications.

So I can go on, but hopefully, I gave you a flavor there.

Yes.

That's super helpful.

Maybe one last question for me on the Brazil side.

Last quarter, you guys mentioned that the -- with the new local content rules, customers are giving you more visibility into their requirements.

And obviously, you guys did better than what you thought going to the last quarter.

How would you characterize that visibility?

Is that aboard in a few months?

And maybe related to that, ASP has been a big headwind for you guys in the past few quarters.

How do you think about ASP going forward at this point?

So I'll tackle ASP first.

So this quarter, we definitely saw about a 50% drop in ASPs in mobile.

But we expect that in Q2, our ASPs will start to go up in mobile as the content per funnel is going to start to go up.

Yes, we are getting good visibility from our customers.

We're getting -- we get 6 months of pretty good visibility.

And we have to create new products pretty early in the process.

And so we look -- as we get into our Q2, we will start shipping higher density products to our phone customers, so we expect our ASPs to start to increase again as we get into Q2.

And that's long overdue.

We've been predicting or maybe wishing that as memory prices come down, the amount of memory that goes into a phone will go up.

But it hasn't been.

And this is the first indication that in Q2, we start to see the densities go up.

Now I just -- much as we do get pretty good visibility, obviously, our customers have the ability to move their forecasts up and down.

So just to be clear, these are not like fixed 6-month forecast.

But nevertheless, it's great visibility and it's better than it used to be even.

(Operator Instructions) Our next question comes from the line of Suji Desilva with Roth Capital.

To follow up on maybe Sidney's question about Brazil and to ask, now that we have a more normalized pricing environment, you have better visibility, is there kind of a thought process for what kind of year-over-year growth we can expect from the current levels now that they've stabilized versus obviously 50% down that came last year because of the pricing?

You're saying year-over-year for Brazil?

Correct, correct.

Now that they've leveled out, what's a more reasonable expectation for year-over-year growth?

Well, I mean, year-over-year, if you look at fiscal year '20 versus fiscal year '19, I mean, Brazil will not grow.

I mean, just remember, in Q1 '19, we did almost $200 million of revenue in Brazil, right, and that was a monster quarter.

So...

Jack, I was referring more to quarter-to-quarter.

From this quarter, say, 4 quarters out kind of...

Yes.

I mean, if you look at it -- well, even Q2, right?

It's still -- maybe as we start to get into Q3 and Q4 for Brazil, then I think you can start looking at maybe we'll start growing that business 5%, 10% maybe.

Quarter-over-quarter.

Quarter-over-quarter.

Yes.

I think, see, the good and bad news is that the Brazil business is dependent on memory ASPs.

But as a result, what we really could say is that if you take out sort of cyclicality, which I don't know how you do that completely, but I think overall, we're looking at unit growth of 10% to 15% a year, somewhere around that.

And we're looking for densities to grow to neutralize the falling cost per bit, at least.

And so we would expect that kind of 15-ish percent type of annual growth.

But of course, the cycles don't show the numbers that way.

Okay.

I appreciate.

Now we actually can ask that question, so with a better environment that way.

And then, also, the Specialty Compute businesses you've acquired and put together, where are you in the gross margin improvement versus what you've targeted from acquisition integration?

Are we already there or is there more room across Penguin, Artesyn and Inforce to expand the gross margin, just on kind of bringing those into the fold in SMART Global?

We've made a lot of progress on Penguin.

I mean gross margins have gone up 600, 700 basis points and they look to continue to be in that range.

So we've gotten a large part of kind of efficiency-related gross margin improvements.

Now we have to get to business model-related gross margin improvements.

What that means is that our services component has to come up as a percent of the revenue.

What that means is that we need to be able to provide more value-add to our solutions approach.

And so it's no longer -- well, better supply chain management, better manufacturing, better -- and so on and so on.

And so that's kind of where we are with respect to Penguin.

With respect to the other 2 businesses, they're still very, very early, but we didn't forecast.

I mean the good and bad news is we didn't expect huge margin improvement in terms of gross margin for those businesses.

We had -- through the transfer from external manufacturing, for the Artesyn Embedded Computing business to our own factories, we gained -- we have modeled again in which we've already, to a good extent, accomplished.

And that was simply by -- we would not add much overhead in our factories while we take out a bunch of third-party costs.

Okay, helpful.

And then one last question.

I know you mentioned SSD controllers.

And can you just recap that -- the strategy you have there and trying to be neutral to, I guess, certain elements?

And then what's the size of that opportunity?

Is that a small uptake or is that a meaningful uptake relative to your revenue?

It is a seminal opportunity.

It is one of our biggest opportunities in a range of applications like industrial, like defense, like networking and telecom, medical, just a range of applications where you need an SSD that is tuned for that particular requirement.

To this point, including up to today, we've been using not only third-party controllers but to a good extent, did not have control over the firmware.

About a year, a year and a quarter ago, we started to invest in our own firmware.

We built up a pretty significant team, over 40-strong engineers have been our investment over the last year-plus.

And that is starting to now be a product, which is what I was trying to say.

So that significant investment which has been part of our business, as you've seen it over the last year, has now, in the next few months, we will start to introduce specific products, and that gives us 2 benefits.

One is a lower cost because we control our own destiny with respect to the controllers and firmware, and the other is a much better ability to tailor our products to these different applications because we control the firmware and we control the functionality of the flash through that.

So it's a very significant milestone for us.

Obviously, we then have to get the products out, get design wins, get -- before we get to design wins, get the leads, get the marketing machine going, but it's a very meaningful advance in our products.

I'm showing no further questions in queue at this time.

I'd like to turn the call back to Ajay Shah for closing remarks.

Thank you, operator.

Well, thank you all for your interest.

We look forward to reporting on our progress in the coming months and to meeting many of you at CES, if you're going to be there, or at any of the conferences like the Needham Growth Conference coming up in January.

I wish you all Happy Holidays and all the best for the coming year.

Thank you once again for your interest.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.